Thus far, we have lauded mutual funds' virtues. They don't require a large up-front investment. They're professionally managed. They're easy to buy and sell. And if you shop carefully, you can limit how much you have to pay to own them.

But there is one thing that mutual funds may not be: tax-friendly. In the following section, we'll explore reasons for this weakness and examine the ways in which you can minimize its impact on your bottom line.